Future Tech China: Douyin’s Winning 2021 Playbook

This post originally appeared on Content Commerce Insider, our sister publication on branded entertainment.

Who can boast the following triple whammy?

  1. A brand new mobile payment service.

  2. Exclusive partnership to sponsor CCTV’s Spring Festival Gala.

  3. All of Gen Z’s attention.

That’s right. It’s the Chinese version of TikTok, the innocuous fun factory your baby nephew and mom are addicted to. But the gloves are coming off for Douyin this year. Here’s what they’ll do to guarantee their ascendancy at home in China over the course of 2021.

1. Closing the Commerce Loop With Payments

In the Chinese market, if you want to compete as an ecosystem or a platform, you must control all transactions. In July 2020, Meituan temporarily canceled the use of Alipay on its platform. When users objected (fervently), Meituan founder Wang Xing pointed out that his company had to cover processing fees for Alipay and rival Tencent’s WeChat Pay. Obviously, the platform bears these costs, not the user. Internet companies in China mostly operate in a zero-sum environment: you either win or lose. So every yuan in transaction fees that goes to Alipay or WeChat Pay is a yuan lost to a competitor.

And thus, on January 20, Douyin Pay was launched, operating with an initial no-fee policy — unlike Alipay and WeChat Pay, which both have fees for withdrawals and transfers by users and third parties. This is very likely to change as Douyin gains market share, but it represents a valuable proposition for users. For any platform-based firm, the payment link is key to the establishment and growth of its internal platform economy. Without the payment element, internet companies remain dependent on the likes of Alipay and WeChat Pay to complete transactions. See, for example, Kuaishou, which doesn’t (yet) control the entire commerce loop and remains dependent on Alibaba and Tencent.

Of course, Douyin hasn’t immediately shut out the competition, since both Alipay and WeChat options are still available to its users. So Douyin’s upcoming priorities are, first, to get people to sign up for its payments service, and, second, to get vendors on board. The latter will take a lot of time, as Alipay and WeChat Pay have become the standard for both online and offline commerce. So Douyin has a lot of catching up to do. But one thing will definitely help with its user acquisition…

2. Partnering With CCTV’s Spring Festival Gala 

Over the past week or so, Chinese media has been abuzz with rumors that Douyin would take over the exclusive contract for the interactive partnership of CCTV’s Spring Festival Gala, which is viewed by pretty much all of China (no joke, it had an audience of 1.23 billion in 2020) during the eve of the Lunar New Year, functioning as a familiar backdrop during family gatherings for the holiday. Since 2014, one lucky tech company has been named to give away “lucky money” (aka red envelopes/red packets, or hongbao, 红包) to viewers during the hours-long broadcast. The big internet players fight for the right to bestow loads of money for a reason.

In “The Secret to China’s Mass Adoption of Tech,” I explained how financial incentives have subsidized China’s tech adoption, especially when it comes to payment services. WeChat Pay was the first interactive sponsor of the CCTV gala in 2014, and it had less than 8 million users before the broadcast. But within two days of the show’s airing, WeChat saw some 200 million bank cards added to the WeChat Pay system. The CCTV Spring Festival Gala is a make-or-break moment for new payment providers, such as Douyin Pay. This week, it was officially confirmed that Douyin will take on the sponsorship role, and plans to give away RMB 1.2 billion ($185 million) during the broadcast.

3. Expanding on the E-commerce Front

Douyin used to allow its primary retail partner, Alibaba’s Taobao, to sell through short videos on its platform. Sellers were able to create videos and directly embed e-commerce links enabling users to purchase products from Taobao. It was a close partnership, and Douyin even set up its e-commerce headquarters just two miles from Taobao’s offices in Hangzhou. But the fairytale came to an end in August 2020, when Douyin announced that it would ban links to Taobao, third-party websites, and promotions from third-party e-commerce platforms, as well as requiring merchants to use its proprietary matching service to find influencers to work with on Douyin. So now the geographic juxtaposition just seems invidious. But it worked.

From January to November 2020, Douyin’s overall e-commerce gross merchandise volume (GMV) saw an 11-fold increase, and, more importantly, GMV for Douyin Stores saw a 44.9x increase. And that’s with Douyin taking a 5% transaction fee on sales (Taobao takes no transaction fees, while Tmall takes anywhere from 0.5-5%). Add transaction fees to the fact that advertising represents the biggest share of Douyin’s revenues, and you’ve got yourself a feast. But Douyin, like all other internet companies, has decided that advertising and transaction fees aren’t enough for its empire, so…

4. Kickstarting Financial Services

Fintech services are the end-all-be-all for Chinese internet companies. No matter how great profits may be in absolute terms, profit margins still matter. Ant Group’s profit margin is around 30%, whereas Tencent and Alibaba’s hover around 25% to 27%. Meituan, on the other hand, which as a predominantly food-oriented delivery service is more connected to the offline world, just managed to start turning a profit. Fintech offerings such as loans and credit lines significantly increase profit margins. But how likely is it that a short video platform will go down this route? Sure, if YouTube said they’d start giving out loans, it would sound very odd. But in China, it’s actually very likely.

Meituan, for example, already has a consumer credit program, as do ride-hailing giant Didi (Dishuidai), social media platform Weibo (Sina Finance), and search engine leader Baidu (Baidu Youqian). It’s become so common that more than 200 companies now hold internet payment licenses. You’ll be hard-pressed to find a Chinese internet company that doesn’t have a payment option. And the ultimate reason why they all believe they’ll at least be moderately successful at fintech is that they believe that the data they gather on their users will allow them to accurately predict financial needs. I’m not sure what my transportation needs or short video preferences have to say about my financial status, but we’ll see.

Separately, Bytedance has also already won four licenses for insurance, securities investment, and online microfinance over the past three years. And yes, Alipay and WeChat Pay both have a massive moat, fueled by Alibaba’s Taobao and Tmall and Tencent’s WeChat. Most of that moat is based on how entrenched Alipay and WeChat Pay are among third-party vendors. It’s the standard. For now. But that could soon change.

5. Evading Major Regulatory Pitfalls

As Alipay’s financial empire-building is coming to a screeching regulatory halt, Douyin Pay is trying to swoop in. China’s new regulations on “non-bank payment institutions,” released earlier this month, will help, stating, among other things, that a single payment provider cannot control more than half the market, and two providers can’t have a combined market share of more than 75%.

With Ant Group boasting a 55.6% market share and Tencent at 38.8%, they’ll clearly find themselves in the crosshairs. Time will tell what happens to these two giants. Tick Tock.

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